Wednesday, February 20, 2013

A new proposal for state employee pensions would make the temporary income tax increase permanent to cover pension costs.

Skokie Rep. Lou Lang, a member of House Democratic leadership, pitched House Bill 2375 today. He said that all the other pension plans that have been up for consideration violate the constitutional protection of state workers’ retirement benefits. “I am not going to vote for a pension bill that I think is unconstitutional. This is the very first proposal on the table in all this time that is constitutional,” Lang said. “I think this debate has to start with a constitutional piece of legislation. Can we negotiate things? Of course we can. Can we talk things through? Certainly we will. But this is a good start to putting something on the table that will resolve the problem of the pension system.”
Lang’s bill would make permanent the temporary personal income tax increase, which was passed in 2011, and dedicate the revenues to paying down the state’s almost $100 billion in unfunded pension liability. The tax increase is scheduled to start phasing out in 2015. Lang's proposal would guarantee annual pension payments from the state and restructure the so-called ramp, the state’s plan for paying off the unfunded liability. Lang said that under his plan, pensions would be 80 percent funded after 50 years.

The measure would also increase the retirement age to 67 and phase in over six years employees' contribution of an additional 3 percent of salary. Any money from the tax increase that is not needed for the annual contribution would be refunded to taxpayers. Lang does not yet have actuarial numbers for his plan. But he says estimates that starting in 2020, there would be at least $1 billion in funds for rebates. “There was an expectation by some taxpayers that we would be ending the additional 2 percent income tax increase. This is my way to say to them, ‘I’m sorry you’re going to have to share some sacrifice with us for a little longer, but I’m going to do my best to get as much money back to you as I can.’”

The bill calls for money currently being used to pay off pension bonds, which were issued when lawmakers and governors opted to borrow instead of making the annual pension contributions, to pay down the unfunded liability once the bonds are paid off.

The idea comes from a proposal by West Chicago Republican Rep. Mike Fortner. HB 2365, which Fortner introduced yesterday, calls for the pension bond revenue to shift to the liability once the bonds have matured. It also would require employees to contribute 8 percent of their salaries, which is the amount participants in the State University Retirement System currently pay. The proposal would also cap pensionable salary and offer an optional self-managed defined benefit plan. Such a plan is currently offered to university employees. “It draws a certain percentage of people who for various family reasons and fiscal reasons in their household find that it works better for them to do that. It’s purely a choice. That’s constitutional,” Fortner said of the self-managed plan. “It’s not as aggressive of some of the other ones, but I am confident it’s constitutional because we have a long history of doing it.”

Fortner says his bill would “bring the rate of growth of the pension payments to a level that matches the rate of our natural revenue growth without a tax hike.” He says his plan would fully fund the pension systems by 2045. Both Lang’s proposal and Fortner’s proposal would include judges' pension systems. Previous proposals up for consideration did not. Sponsors of other plans have said that they did not want to create a conflict of interest for judges who might rule on the constitutionality of any pension changes that became law.

Lawmakers also have a union-backed proposal before them for the first time in the form of legislation. Senate Bill 2404 would require employees to pay an additional 2 percent of salary, phased in over two years, and guarantee that the state makes its required annual contribution. “The [union] coalition considers the introduction of SB 2404 to be the beginning of a discussion that the unions intend to see end with an agreement on a fair and constitutional bill that, when passed, will help Illinois get back on solid financial footing and ensure the participants on the state pension systems receive the pensions they have been promised,” said a statement from the Illinois Education Association.

But House Minority Leader Tom Cross does not support either Lang’s plan of the union-backed bill. “Leader Cross is not in favor of Rep. Lang’s proposal. He doesn’t believe that hardworking taxpayers in Illinois would be in favor of keeping their income taxes at a high level to pour that money into a broken pension system. We do not believe that this bill fixes our pension problem, which is the goal,” Sara Wojcicki Jimenez, a Cross spokeswoman, said in a prepared statement. “He also does not favor SB 2404. Leader Cross, [Northbrook Democratic] Rep. [Elaine] Nekritz and others are continuing to work on a comprehensive plan that will fix our pension problem — those details will be coming in the near future.”

Nekritz, who has tried to shepherd several versions of pension reform through the House, said she is continuing to negotiate pension legislation and is meeting with new legislators to educate them on the pension problem. She said negotiations are also ongoing. “While they knew it was bad, maybe they didn’t know it was this bad. And so the solutions, while they seem really difficult, are in fact the solutions that are needed to solve that big a problem. And I think we’re getting them to understand that.” Nekritz has her own bill, HB 98. Her plan would fully fund the system by 2043.

“I think there are a number of ideas that are out there that are interesting to look at,” Gov. Pat Quinn said today. However, he is generally sticking by his preference of Senate Bill 1. Senate President John Cullerton proposed SB1 as a compromise. It contains a proposal that was previously sponsored by Nekritz and being considered in the House during the lame duck session. That provision would temporarily freeze cost-of-living increases, require higher contributions from employees, put a cap pensionable salary and include a guarantee that the state makes its annual required contribution to the pension systems. The bill also tacks on a proposal that Cullerton says is constitutional He believes that to pass constitutional muster, some consideration must be given to workers for any reduction in their benefits. Legislation that passed in the Senate last year would have asked employees to choose between their compounded-interest cost-of-living adjustments or state-subsidized retiree health care. If the Supreme Court were to rule the House plan constitutional, it would become the law. But if the court rejected the House proposal, the Senate version could then be considered.

“I think that’s the right vehicle,” he said. “I think SB 1 understands that there are different concepts, but you can put them in one bill that can get the job done. ... There may be refinements, that’s part of the legislative process in both the House and the Senate, and people may have a new idea or two that could be useful, and if that’s the case, we put it in.”
Quinn said of Lang’s proposal to extend the tax increase to pay off pension costs: “I really don’t feel that solving the pension problem is ... a revenue issue. I think we have to deal with it on a comprehensive basis, so it’s not just about revenue. It’s a lot more than that.”

But Lang said that even if a pension plan is signed into law and survives a court challenge, it is likely that the state would not be able to afford employee retirement costs without continuing the tax increase. “Even if one of the current reform plans on the table can reduce our annual pension payment from $6.5 billion to, let’s say, $4 billion, the inconvenient truth is without the income tax increase, we don’t have the $4 billion,” Lang said. “To pretend that Illinois can pay for even a reformed pension system without a portion of the current tax increase money is to whistle past reality.”

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